US 20030074306 A1 Abstract A system and method for generating and managing a generic mortgage-backed securities index. Bonds are selected for the index on a monthly basis. In order to determine which bonds will be represented in the index during a particular month, a set of calculations is performed during the second business week of the preceding month. For the purpose of selecting bonds for the index, all outstanding mortgage-backed securities are considered. They are first aggregated into pools based on their coupon and original term, and then their total outstanding principals are considered. If the total principal outstanding of any 30-year coupon represents more than a predetermined percentage such as 1.5% of the total, then this 30-year coupon will be included in the Index. Similarly, if the total principal outstanding on any 15-year coupon represents more than a second predetermined percentage such as 0.4% of the total, then this 15-year coupon will be included in the Index. The performance of the Index is measured by its total return. An algorithm for calculating the total return of the generic Index is also provided. The total return of the index partially depends on the relative weight assigned to each particular security included in the index. The present invention provides a method of assigning relative weights in accordance with relative proportions of different individual securities in the index, and covers the frequency of re-weighting.
Claims(75) 1. A method for managing a mortgage-backed securities index, comprising the steps of:
a. selecting a set of mortgage-backed securities to be included in said mortgage-backed securities index, said set of mortgaged-backed securities being selected from all outstanding mortgage-backed securities; b. assigning a relative weight to each security within said selected set, said relative weight being a relative proportion of total outstanding principal on said each security to the total outstanding principal on all securities within said selected set; c. calculating a total return of said mortgage-backed securities index, said total return being based on said assigned relative weight for said each security, and a total return of said each security based on a same-day-settle price. 2. A method for managing a mortgage-backed securities index according to a. aggregating said all outstanding mortgage-backed securities in to a plurality of pools, each of said pools comprising mortgage-backed securities having the same coupon and the same original term; and b. calculating an inclusion criteria for each pool within said plurality of pools. 3. A method for managing a mortgage-backed securities index according to wherein ρ
_{a,c,t }is the total outstanding principal on said outstanding mortgage-backed securities, a is an agency which issued said outstanding mortgage-backed securities,
c is a coupon value of said outstanding mortgage-backed securities, and
t is an original term of said outstanding mortgage-backed securities.
4. A method for managing a mortgage-backed securities index according to 5. A method for managing a mortgage-backed securities index according to 6. A method for managing a mortgage-backed securities index according to 7. A method for managing a mortgage-backed securities index according to 8. A method for managing a mortgage-backed securities index according to _{2 }is given by the following equation: wherein p
_{t} _{ 1 }is a same-day settle price of said each security on the close of day t_{1}, wherein p_{t} _{ 2 }is a same-day settle price of said each security on the close of day t_{2}, wherein r_{t} _{ 1 }is a one-month BBA LIBOR on the close of day t_{1}, wherein f_{t} _{ 1 }is a monthly pay-down factor of said each security as best determined by day t_{1}, said monthly pay-down factor f_{t} _{ 1 }being selected from a sequence of monthly pay-down factors f_{i}, t_{1 }is the last business day of the preceding month, t_{2 }is any day of the current month, and wherein 9. A method for managing a mortgage-backed securities index according to wherein ρ
_{α,i }is the principal outstanding of pool α as of the first of month i, and wherein ρ_{α,i+1 }is the principal outstanding of pool α as of the first of month i+1. 10. A method for managing a mortgage-backed securities index according to wherein {tilde over (p)}
_{t }is the TBA price of said security 1-month forward standard PSA settle on the close of business on day t; wherein d_{1 }is the number of days into the month that 1-month forward standard PSA settle occurs; wherein d_{2 }is the number of days in between the purchase date and the standard PSA settle date 1-month forward inclusive of the former and exclusive of the latter; wherein, for FNMA mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 25th of the next month; wherein for GNMA or FHLMC mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 15th of the next month; and wherein r is a one-month BBA LIBOR on the close of day t. 11. A method for managing a mortgage-backed securities index according to _{1 }in month k to day t_{2 }in month n is given by the following equation: is the month-to-date total return of said index on the day t
_{1}, and TR_{t} _{ 2 }is the moth-to-date total return of said index on the day t_{2}, wherein TR_{k }is the total return of the index for the month k, and wherein TR_{i }is the total return of the index for any intermediate month between k and n. 12. A method for managing a mortgage-backed securities index according to wherein said total returns of said index on the day t
_{1 }and t_{2 }are given by the following equation: wherein {w
_{i} ^{j}}_{j=1} ^{n }are the relative weights of said mortgage-backed securities within said index, and wherein p_{i} ^{j }is the same-day settle price for said each security within said index. 13. A method for managing a mortgage-backed securities index according to wherein P
_{00/00/00 }is the starting level of said index, wherein TR|_{00/00/00} ^{t }is the total return of said index from start to the day t, and wherein Pt is the current level of the index. 14. A method for managing a mortgage-backed securities index according to 100. 15. A method for managing a mortgage-backed securities index according to 16. A system for managing a mortgage-backed securities index, comprising:
input means for inputting market data into said system, said market data comprising data for all outstanding mortgage-backed securities; selection means for selecting a set of mortgage-backed securities to be included in said mortgage-backed securities index, said set of mortgaged-backed securities being selected from said all outstanding mortgage-backed securities; weight means for assigning a relative weight to each security within said selected set, said relative weight being a relative proportion of total outstanding principal on said each security to a total outstanding principal on all securities within said selected set; and total return means for calculating a total return of said mortgage-backed securities index, said total return being calculated based on said assigned relative weight of said each security within said selected set, and a total return of said each security within said selected set based on a same-day-settle price. 17. A system for managing a mortgage-backed securities index according to 18. A system for managing a mortgage-backed securities index according to 19. A system for managing a mortgage-backed securities index according to 20. A system for managing a mortgage-backed securities index according to 21. A system for managing a mortgage-backed securities index according to wherein ρ
_{a,c,t }is the total outstanding principal on said outstanding mortgage-backed securities, a is an agency which issued said outstanding mortgage-backed securities,
c is a coupon value of said outstanding mortgage-backed securities, and
t is an original term of said outstanding mortgage-backed securities.
22. A system for managing a mortgage-backed securities index according to 23. A system for managing a mortgage-backed securities index according to 24. A system for managing a mortgage-backed securities index according to 25. A system for managing a mortgage-backed securities index according to wherein w is said relative weight of said each security within said selected set.
26. A system for managing a mortgage-backed securities index according to 27. A system for managing a mortgage-backed securities index according to _{2 }in accordance with the following equation: wherein p
_{t} _{ 1 }is a same-day settle price of said each security on the close of day t_{1}, wherein p_{t} _{ 2 }is a same-day settle price of said each security on the close of day t_{2}, wherein r_{t} _{ 1 }is a one-month BBA LIBOR on the close of day t_{1}, wherein f_{t} _{ 1 }is a monthly pay-down factor of said each security as best determined by day t_{1}, said monthly pay-down factor f_{t} _{ 1 }being selected from a sequence of monthly pay-down factors f_{i}, t_{1 }is the last business day of the preceding month, t_{2 }is any day of the current month, and wherein 28. A system for managing a mortgage-backed securities index according to wherein ρ
_{α,i }is the principal outstanding of pool α as of the first of month i, and wherein ρ_{α,i+1 }is the principal outstanding of pool α as of the first of month i+1. 29. A system for managing a mortgage-backed securities index according to wherein {tilde over (p)}
_{t }is the TBA price of said security 1-month forward standard PSA settle on the close of business on day t; wherein d_{1 }is the number of days into the month that 1-month forward standard PSA settle occurs; wherein d_{2 }is the number of days in between the purchase date and the standard PSA settle date 1-month forward inclusive of the former and exclusive of the latter; wherein, for FNMA mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 25th of the next month; wherein for GNMA or FHLMC mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 15th of the next month; and wherein r is a one-month BBA LIBOR on the close of day t. 30. A system for managing a mortgage-backed securities index according to _{2 }in month n is given by the following equation: when k<n−1, wherein TR
_{t} _{ 1 }is the month-to-date total return of said index on the day t_{1}, and TR_{t} _{ 2 }is the moth-to-date total return of said index on the day t_{2}, wherein TR_{k }is the total return of the index for the month k, and wherein TR_{i }is the total return of the index for any intermediate month between k and n. 31. A system for managing a mortgage-backed securities index according to wherein said total returns of said index on the day t
_{1 }and t_{2 }are given by the following equation: wherein
are the relative weights of said mortgage-backed securities within said index, and wherein p
_{i} ^{j }is the same-day settle price for said each security within said index. 32. A system for managing a mortgage-backed securities index according to _{1 }in month k to day t_{2 }in month n is given by the following equation: TR|
_{t}
_{
1
}
^{t}
^{
2
}
=TR
_{t}
_{
2
}
−TR
_{t}
_{
1
}
when k=n, wherein TR
_{t} _{ 1 }is the total return of said index on the day t_{1}, and TR_{t} _{ 2 }is the total return of said index on the day t_{2}. 33. A system for managing a mortgage-backed securities index according to _{2 }in month n is given by the following equation: TR| _{t} _{ 1 } ^{t} ^{ 2 }=(1+TR _{k} −TR _{t} _{ 1 })(1+TR _{t} _{ 2 })−1 when k=n−1, wherein TR
_{t} _{ 1 }is the total return of said index on the day t_{1}, wherein TR_{t} _{ 2 }is the total return of said index on the day t_{2}, and wherein TR_{k }is the total return of the index for the month k. 34. A system for managing a mortgage-backed securities index according to 35. A system for managing a mortgage-backed securities index according to wherein P
_{t }is said level of said mortgage-backed securities index on the day t, wherein P_{00/00/00 }is a starting level of said index, and wherein TR|_{00/00/00} ^{t }is the total return of said index from the starting date to the day t. 36. A system for managing a mortgage-backed securities index according to 100. 37. A system for managing a mortgage-backed securities index according to 38. A mortgage-backed securities index, comprising:
a set of mortgage-backed securities, said set of mortgaged-backed securities being selected from all outstanding mortgage-backed securities: wherein a relative weight is assigned to each security within said selected set, said relative weight being a relative proportion of total outstanding principal on said each security to the total outstanding principal on all securities within said selected set, and wherein said mortgage-backed securities index is characterized by a total return of said mortgage-backed securities index, said total return being calculated based on said assigned relative weight for said each security, and a total return of said each security based on a same-day-settle price. 39. A mortgage-backed securities index according to 40. A mortgage-backed securities index according to wherein ρ
_{a,c,t }is the total outstanding principal on said outstanding mortgage-backed securities, a is an agency which issued said outstanding mortgage-backed securities,
c is a coupon value of said outstanding mortgage-backed securities, and
t is an original term of said outstanding mortgage-backed securities.
41. A mortgage-backed securities index according to 42. A mortgage-backed securities index according to 43. A mortgage-backed securities index according to 44. A mortgage-backed securities index according to 45. A mortgage-backed securities index according to _{2 }is given by the following equation: wherein p
_{t} _{ 1 }is a same-day settle price of said each security on the close of day t_{1}, wherein p_{t} _{ 2 }is a same-day settle price of said each security on the close of day t_{2}, wherein r_{t} _{ 1 }, is a one-month BBA LIBOR on the close of day t_{1}, wherein f_{t} _{ 1 }is a monthly pay-down factor of said each security as best determined by day t_{1}, said monthly pay-down factor f_{t} _{ 1 }being selected from a sequence of monthly pay-down factors f_{i}, t_{1 }is the last business day of the preceding month, t_{2 }is any day of the current month, and wherein 46. A mortgage-backed securities index according to wherein ρ
_{α,i }is the principal outstanding of pool α as of the first of month i, and wherein ρ_{α,i+1 }is the principal outstanding of pool α as of the first of month i+1. 47. A mortgage-backed securities index according to wherein {tilde over (p)}
_{t }is the TBA price of said security 1-month forward standard PSA settle on the close of business on day t; wherein d_{1 }is the number of days into the month that 1-month forward standard PSA settle occurs; wherein d_{2 }is the number of days in between the purchase date and the standard PSA settle date 1-month forward inclusive of the former and exclusive of the latter; wherein, for FNMA mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 25th of the next month; wherein for GNMA or FHLMC mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 15th of the next month; and wherein r is a one-month BBA LIBOR on the close of day t. 48. A mortgage-backed securities index according to _{1 }in month k to day t_{2 }in month n is given by the following equation: wherein TR
_{t} _{ 1 }is the month-to-date total return of said index on the day t_{1}, and TR_{t} _{ 2 }is the moth-to-date total return of said index on the day t_{2}, wherein TR_{k }is the total return of the index for the month k, and wherein TR_{i }is the total return of the Index for any intermediate month between k and n. 49. A mortgage-backed securities index according to wherein said total returns of said index on the day t
_{1 }and t_{2 }are given by the following equation wherein
are the relative weights of said mortgage-backed securities within said index, and wherein p
_{i} ^{j }is the same-day settle price for said each security within said index. 50. A mortgage-backed securities index according to wherein P
_{00/00/00 }is the starting level of said index, wherein TR|_{00/00/00} ^{t }is the total return of said index from start to the day t, and wherein P_{t }is the current level of the index. 51. A mortgage-backed securities index according to 100. 52. A mortgage-backed securities index according to 53. A mortgage-backed securities index according to 54. A computer program for managing a mortgage-backed securities index executable on general purpose computer, comprising:
an input segment for inputting market data into said system, said market data comprising data for all outstanding mortgage-backed securities; a selection segment for selecting a set of mortgage-backed securities to be included in said mortgage-backed securities index, said set of mortgaged-backed securities being selected from said all outstanding mortgage-backed securities; a weight segment for assigning a relative weight to each security within said selected set, said relative weight being a relative proportion of total outstanding principal on said each security to a total outstanding principal on all securities within said selected set; and a total return segment for calculating a total return of said mortgage-backed securities index, said total return being calculated based on said assigned relative weight of said each security within said selected set, and a total return of said each security within said selected set based on a same-day-settle price. 55. A computer program for managing a mortgage-backed securities index according to 56. A computer program for managing a mortgage-backed securities index according to 57. A computer program for managing a mortgage-backed securities index according to 58. A computer program for managing a mortgage-backed securities index according to 59. A computer program for managing a mortgage-backed securities index according to _{a,c,t }is the total outstanding principal on said outstanding mortgage-backed securities, a is an agency which issued said outstanding mortgage-blacked securities,
c is a coupon value of said outstanding mortgage-backed securities, and
t is an original term of said outstanding mortgage-backed securities.
60. A computer program for managing a mortgage-backed securities index according to 61. A computer program for managing a mortgage-backed securities index according to 62. A computer program for managing a mortgage-backed securities index according to 63. A computer program for managing a mortgage-backed securities index according to wherein w is said relative weight of said each security within said selected set.
64. A computer program for managing a mortgage-backed securities index according to 65. A computer program for managing a mortgage-backed securities index according to _{2 }in accordance with the following equation: wherein p
_{t} _{ 1 }is a same-day settle price of said each security on the close of day t_{1}, wherein p_{t} _{ 2 }is a same-day settle price of said each security on the close of day t_{2}, wherein r_{t} _{ 1 }is a one-month BBA LIBOR on the close of day t_{1}, wherein f_{t} _{ 1 }is a monthly pay-down factor of said each security as best determined by day t_{1}, said monthly pay-down factor f_{t} _{ 1 }being selected from a sequence of monthly pay-down factors f_{i}, t_{1 }is the last business day of the preceding month, t_{2 }is any day of the current month, and wherein 66. A computer program for managing a mortgage-backed securities index according to _{α,i }is the principal outstanding of pool α as of the first of month i, and wherein ρ_{α,i+1 }is the principal outstanding of pool α as of the first of month i+1. 67. A computer program for managing a mortgage-backed securities index according to _{t }is the TBA price of said security 1-month forward standard PSA settle on the close of business on day t; wherein d_{1 }is the number of days into the month that 1-month forward standard PSA settle occurs; wherein d_{2 }is the number of days in between the purchase date and the standard PSA settle date 1-month forward inclusive of the former and exclusive of the latter; wherein, for FNMA mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 25th of the next month; wherein for GNMA or FHLMC mortgage-backed securities, d_{3 }is the number of days between the purchase date and the 15th of the next month; and wherein r is a one-month BBA LIBOR on the close of day t. 68. A computer program for managing a mortgage-backed securities index according to _{1 }in month k to day t_{2 }in month n is given by the following equation: when k<n−1, wherein TR
_{t} _{ 1 }is the month-to-date total return of said index on the day t_{1}, and TR_{t} _{ 2 }is the moth-to-date total return of said index on the day t_{2}, wherein TR_{k }is the total return of the Index for the month k, and wherein TR_{i }is the total return of the index for any intermediate month between k and n. 69. A computer program for managing a mortgage-backed securities index according to wherein said total returns of said index on the day t
_{1 }and t_{2 }are given by the following equation: wherein
are the relative weights of said mortgage-backed securities within said index, and wherein p
_{i} ^{j }is the same-day settle price for said each security within said index. 70. A computer program for managing a mortgage-backed securities index according to _{1 }in month k to day t_{2 }in month n is given by the following equation: TR|
_{t}
_{
1
}
^{t}
^{
2
}
=TR
_{t}
_{
2
}
−TR
_{t}
_{
1
}
when k=n, wherein TR
_{t} _{ 1 }is the total return of said index on the day t_{1}, and TR_{t} _{ 2 }is the total return of said index on the day t_{2}. 71. A computer program for managing a mortgage-backed securities index according to _{1 }in month k to day t_{2 }in month n is given by the following equation: TR| _{t} _{ 1 } ^{t} ^{ 2 }=(1+TR _{k} −TR _{t} _{ 1 })(1+TR _{t} _{ 2 })−1 when k=n−1, wherein TR
_{t} _{ 1 }is the total return of said index on the day t_{1}, wherein TR_{t} _{ 2 }is the total return of said index on the day t_{2 }and wherein TR_{k }is the total return of the index for the month k. 72. A computer program for managing a mortgage-backed securities index according to 73. A computer program for managing a mortgage-backed securities index according to wherein P
_{t }is said level of said mortgage-backed securities index on the day t, wherein P_{00/00/00 }is a starting level of said index, and wherein TR|_{00/00/00} ^{t }is the total return of said index from the starting date to the day t. 74. A computer program for managing a mortgage-backed securities index according to 100. 75. A computer program for managing a mortgage-backed securities index according to Description [0001] 1. Field of the Invention [0002] The invention generally relates to a method and system for generating an Index-type benchmark for a mortgage-backed securities (MBS) sector of the securities market. [0003] 2. Description of the Related Art [0004] In the stock market, an index is a device that measures changes in the prices of a basket of shares, and represents the changes using a single Fig. The purpose is to give investors an easy way to see the general direction of shares in the index. The FTSE 100 Index, for example, is calculated by taking a weighted average of the share prices of the largest 100 companies on the London Stock Exchange. Launched in 1984 with a base Fig. of 1,000, the FTSE is calculated continuously throughout the trading day. [0005] Generally speaking, an index is defined by a pre-determined universe of individual issues valued or weighted in proportion to their size within the whole universe of issues. The Standard & Poor's 500 Index is an example of such an index and is based on the common stocks of the 500 largest corporations which trade on United States exchanges. Illustratively, the weighting for each different security in the S & P 500 index is simply the market capitalization of that security expressed as a percentage of the total market capitalization taken across all the securities then in the index. Of course, these weights continually change as share prices move which, in turn, changes market capitalization both of each individual security in the index as well as that across the entire index. Other indices, such as the Value Line index, assign their own, e.g. equal, weightings to each security therein. [0006] Capitalization weighting is the most common approach to equity indices and equity portfolios. Cap-weighted portfolios are easy to maintain because the rebalancing process takes care of itself. An algorithm for rebalancing a capitalization weighted stock index is disclosed, for example, in U.S. Pat. No. 6,061,663 (the '663 patent). The '663 patent teaches a method and system for rebalancing an equity portfolio based on weighting characteristics of individual securities. Similar to other known equity indices, e.g. S&P 500 Index, in the '663 patent the weighting characteristic of a particular security is based on the market capitalization of that security expressed as a percentage of the total market capitalization taken across all the securities then in the index. The computer program disclosed in the '663 patent includes instructions to classify stocks in the index into several categories by comparing their capitalization weight to a threshold level. [0007] Similarly, U.S. Pat. No. 5,819,238 (the '238 patent) discloses a method for automatically modifying a financial portfolio having a pre-defined universe of securities, such as an index fund that tracks a given capitalization weighted index, through dynamic re-weighting of a position held in each such security. Specifically, in the disclosed computer system, a target weight is associated with each such security relative to others in the same portfolio in proportion to a non-constant function of current capitalization weights of the securities in the index. Once these target weights are determined, then, in response to both the target weight of each such security and an actual weight, as a proportion of the portfolio in which that security was held, a trade will be generated by the system in order to conform, within a predefined band, the actual weight to the target weight so as to rebalance the holdings in the portfolio. [0008] For indices reflecting international securities markets, relative weights may be calculated based on countries' relative GDPs or imports. [0009] Indices are currently used in the industry as benchmarks allowing investors and portfolio managers to compare performance of one sector of the securities market to others. Indices are often used in order to create index funds, i.e., funds that purchase securities that mimic or represent a specific index, for example the Vanguard 500 Index Fund mimics the composition and, supposedly, performance of the S & P 500 stock index. [0010] Mortgage-Backed Securities are securities backed by mortgage loans, including pass-through securities, modified pass-through securities, mortgage-backed bonds, and mortgage pay-through securities. MBS are created when mortgage loans are pooled and underwritten by eligible issuers. Conmmonly referred to as “pass-through” certificates, these MBS entitle an investor to an undivided interest in the underlying mortgage loan pool. Thus, an investor receives a pro rata share of the interest (net of servicing and guaranty fees) and/or principal on the underlying mortgage loans. [0011] Several financial institutions have developed indexes for measuring changes in the MBS markets. For example, Lehman Brothers has developed an MBS Index (hereinafter “LB MBS Index”) which covers the mortgage-backed pass-through securities of GNMA (also known as “Ginnie Mae”), FNMA (also known as “Fannie Mae”), and FHIMC (also known as “Freddie Mac”). It is formed by grouping the universe of over 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates. The aggregates included are priced daily using a matrix pricing routine based on trade price quotations by agency, program, coupon, and degree of seasoning. Lehman Brothers also developed a Mortgage-Backed Securities Index which is an unmanaged version of the LB MBS index and is composed of all fixed securities mortgage pools by GNMA, FNMA and the FHLMC, including GNMA Graduated Payment Mortgages. [0012] In order to generate one of the LB MBS indices, a user must first select a set of securities that satisfy a number of subjective rules (for example, the total outstanding balance of each generic security must be at least $100 million), then price each issue within the index based on the provided “matrix pricing,” calculate the returns of each individual security within the index and calculate the index return as a market-weighted average of individual security returns. The weights of individual securities are subjectively assigned and are not related to the proportion of the total outstanding principal on a particular security and total outstanding principal for the selected pool. Additionally, as explained further below, mortgage-backed securities are traded in “to-be-announced” (TBA) transactions where the purchase price is settled at some future TBA date. In order to calculate an index's total return, TBA settle prices for each security have to be converted into same-day-settle prices. According to the LB MBS Index's published algorithm, this process involves complicated calculations which include adjustments for an unknown future cash flow. [0013] The present invention is directed to a method and system for generating an MBS Index by objectively selecting securities from all available mortgage-backed securities, assigning a relative weight to each selected security, evaluating the MBS Index by calculating its total return and periodically rebalancing the Index. There is a need in the industry for a system and method for generating an MBS Index, which would objectively select mortgage-based securities from the entire universe of available securities based on an easy-to-administer mathematical algorithm. There is also a need for a simple and objective system and method for calculating total return of the MBS Index based on same-day-settle price of each included security that would eliminate any guess work as to the future cash flow. [0014] It is an object of the present invention to provide a system and method for generating an objective benchmark, which will accurately reflect the value of the MBS sector of the securities market. [0015] It is another object of the present invention to provide a system and method for generating an MBS Index, which will take into consideration all outstanding mortgage-backed securities. [0016] It is a further object of the present invention to provide a system and method for managing an MBS index, which can be easily automatically rebalanced. [0017] It is still another object of the present invention to provide a system and method for generating and managing an MBS Index, which will allow portfolio managers to more precisely measure the performance of the mortgage-backed securities sector relative to other fixed-income investments. [0018] It is still a further object of the present invention to provide a system and a method that allow portfolio managers to create mutual or exchange-traded finds, which will purchase, hold and sell mortgage-backed securities mimicking and/or representing the provided MBS Index. [0019] In accordance with the preferred embodiment of the present invention, a system and method for generating and managing an MBS Index are provided. In order to determine which securities will be represented in the Index during a particular month, the system and method of the present invention perform a set of calculations during the second business week of the preceding month. For the purpose of selecting securities for the Index, all outstanding mortgage-backed securities are considered. They are preferably aggregated into pools based on their coupon and original term (e.g. 15 and 30 years). If the total principal outstanding for any 30-year coupon represents more than 1.5% of the total, then this 30-year coupon will be included in the Index. Similarly, if the total principal outstanding on any 15-year coupon represents more than 0.4% of the total, then this 15-year coupon will be included in the Index. [0020] The performance of the Index is measured by its total return. The system and method of the invention calculate the total return of the generic Index in accordance with an algorithm which is provided herein. In the preferred embodiment, the total return of the Index depends on a total return of each security included in the index weighted according to the relative weight assigned to such particular security. The present invention provides a method of assigning relative weights, which represent relative proportions of different generic securities in the generic MBS Index, and covers the frequency of reweighing. In accordance with another embodiment of the present invention, the system and method may be modified to produce the relative weights of the individual securities within Conventional, Government, 30-year, and 15-year indices. [0021] The above and other objects, aspects, features and advantages of the invention will be more readily apparent from the description of the preferred embodiments thereof taken in conjunction with the accompanying drawings and appended claims. [0022] The invention is illustrated by way of the example described below and the Fig.s of the accompanying drawings in which like references denote like or corresponding parts, which in no way should be considered as a limitation of the invention. [0023]FIG. 1 is a block diagram of the system [0024]FIG. 2 is a functional diagram of the discrete components and information flow within the system for generating and managing an MBS Index in accordance with the present invention; [0025]FIG. 3 is the table of The Bond Market Association MBS Notification and Settlement Dates from May 2001 to August 2001, the list was last updated on Apr. 27, 2001; [0026]FIG. 4 is a schematic flow chart of the steps to be performed in the method of the present invention; [0027]FIG. 5 is a logic flow chart of the processing logic for the index composition determination; [0028]FIG. 6 is a logic flow chart of the processing logic for the relative weights calculation; [0029]FIG. 7 is a logic flow chart of the processing logic for the pay-down factor determination; [0030]FIG. 8 is a logic flow chart of the processing logic for the same-day-settle price conversion; and [0031]FIG. 9 is a logic flow chart of the processing logic for the determination of total return of the MBS Index. [0032] In accordance with the preferred embodiment of the present invention, a system and method for generating, evaluating and managing different Mortgage-Backed Securities Indices (hereinafter MBS Indices) are provided. The method of the invention is accomplished by a system, as shown in FIGS. 1 and 2 (described further below), which may be implemented by a general purpose computer operating in accordance with the instructions provided by the system. The system [0033] The invention is described herein in connection with MESS indices implemented by Credit Suisse First Boston (“CSFB”), a global investment bank providing securities underwriting, sales and trading, investment banking, private equity, financial advisory and other related services. There are sixty four (64) different MBS indices currently developed by CSFB. This application discloses the invention with regard to the generic MBS Index (ire., TBA Mortgage Index), unless otherwise specified. As will be apparent to one of ordinary skill in the art, the algorithm may be modified to generate and manage different MBS indices. This disclosure provides examples of such possible modifications where appropriate. For example, individual weight-calculating formulas are provided for Conventional, Government, 30-year and 15-year indices. [0034]FIG. 4 is a flow chart of the method of the present invention. The method may be implemented by a general purpose computer operating in accordance with an algorithm [0035] In accordance with the preferred embodiment, each provided Index may also be characterized by its level. The level of the Index is based on the total return of the Index over the life of the Index (or any other desired time interval) and is calculated in block [0036] Referring specifically to the operations to be performed in blocks [0037] Generic mortgage-backed securities are preferably differentiated by agency, coupon, and original term only. Before the relative weights are computed, the composition of the Index has to be ascertained, i.e., it has to be determined which securities to include in the Index and which to exclude from the Index. For this purpose, all TBA-eligible pools (i.e., pools of mortgage-backed securities eligible for “to-be-announced” transactions) should be considered. TBA-eligible pools are defined by the Bond Market Association (also referred to in the present disclosure as PSA, i.e., Public Securities Association), and these definitions are incorporated herein by reference. These TBA-eligible pools will preferably include mortgage-backed securities issued by FNMA, GNMA I (i.e., modified pass-through mortgage-backed securities on which registered holders receive separate principal and interest payments on each of their certificates), GNMA II (i.e., modified pass-through mortgage-backed securities on which registered holders receive an aggregate principal and interest payment from a central paying agent on all of their Ginnie Mae II MBS), and/or FHLMC, all with fixed-rate coupons and original terms of 30 or 15 years. These pools are preferably aggregated based solely on coupon and original term. The original year term and the coupon value may be preprogrammed in the system or may be input into the system as operating parameters. Additional information related to these MBS may also be preprogrammed or input into the system. [0038] In accordance with the preferred embodiment, if the total principal outstanding of any 30-year coupon represents more than 1.5% of the total outstanding principal for all considered pools, then that 30-year coupon will be included in the Index. Likewise, if the total principal outstanding on any 15-year coupon represents more than 0.4% of the total outstanding principal for all considered pools, then that 15-year coupon will be included in the Index. For example, if 30-year coupons having value of 8.5% represent more than 1.5% of the total principal outstanding, then FNMA 8.5, GNMA 8.5 and FHLMC 8.5 are all included in the generic TBA Mortgage Index. If, collectively, they represent less than 1.5% of the total outstanding, then none of these generic securities is included in the Index. The percentages (i.e., the 1.5% and 0.4% thresholds values) for each coupon term may be preprogrammed in the system or input into the system as operating parameters. In an alternative embodiment, after the above conditions are satisfied, the Index may include only the top six 30-year coupons and the top six 15-year coupons, as ranked by their outstanding principals. The number of coupons to be included in the index may also be preprogrammed or input into the system. [0039] The data regarding outstanding principal amounts may be continuously streamed into the system or input into the system when it becomes available. The above calculations are preferably performed during the second full business week of each month, when the agencies' data becomes available, in order to determine which bonds to include in the Index as of the close of the last business day of that month. It should be noted that inclusion in one month does not guarantee inclusion in the next month. The time for performing the above calculations (i.e., the second full business week) may be preprogrammed in the system or input into the system as an operating parameter. [0040] The total principal outstanding in a TBA eligible pool issued by agency a with a coupon c and original term t as of the first of each month is referred to herein as ρ x x x [0041] with
[0042] The system determines the composition of the index based on the preprogrammed values, operating parameters and the agencies' input principal data in accordance with the above equation to perform step [0043] After deciding which generic mortgage-backed securities are to be included in the Index, the relative weight of each generic pass-through may be assigned (step [0044] Although the relative weights are preferably calculated during the second week of each month, they preferably become effective as of the close of the last business day of the month in which the calculation took place. The time for calculating the relative weights and the time they become effective may be preprogrammed in the system or input into the system as operating parameters. To ensure reliability of the data used in the disclosed calculations, the sources of all data pertaining to outstanding principals should be the agencies themselves. On the last business day of each month, a set of weights for each index is output or otherwise published. [0045] The above algorithm for including and excluding generic pass-throughs and for calculating their relative weights within the generic MBS Index may be modified to produce the weights of the Conventional, Government, 30-year, and 15-year indices. An operation parameter may be input into the system to signal this modification in the provided method. For the Conventional Pass Through Index, when computing the weights using Equation 1.3, all weights assigned to Ginnie Mae pass-throughs are set to 0 during the final, step. Similarly, when computing the weights for the Ginnie Mae (i.e., “Government”) Pass-Through Index using Equation 1.3, all weights assigned to non-Ginnie Mae pass-throughs are set to 0 during the final step. When computing the weights for the 30-Year Pass-Through Index using the above algorithm, all weights assigned to 180-month original term pass-throughs are set to 0 during the final step. Similarly, when computing the weights for the 15-Year Pass-Through Index using the above algorithm, all weights assigned to 360-month original term pass-throughs are set to 0 during the final step. Therefore, when total returns of these indices are calculated, total returns from the excluded securities will be equal to “0,” and only returns from the included securities will be considered and outputted from the system. Thus, even though all outstanding mortgage-backed securities will be considered in the initial selection process, the total return, level and other performance characteristics provided to an end user will only relate to the desired Index. For example, if the user desires to receive information about performance of the 30-year MBS Index, total returns from all 15-year securities will be equal to “0” and the displayed characteristics will only relate to 30-year mortgage-backed securities. [0046] With respect to step [0047] As described above, on the last business day of each month a set of relative weights for issues included in the Index is introduced. For the month following the month when calculations took place these weights represent relative proportions of each pass-through selected to be in the Index. Therefore, from the last business day of any month to any business day of the following month, a fixed portfolio can represent the Index. Accordingly, over this time period the Index total return is equal to the total return of the representative portfolio. For longer time intervals, representative portfolios may be used to calculate the month-to-month returns. Compounding these returns gives the Index return over several months. [0048] For example, to calculate the Index total return from Oct. 14, 2000 until Dec. 15, 2000, representative portfolios may be used to calculate the total returns for the months of Oct. 14, 2000 to Oct. 31, 2000, of Oct. 31, 2000 to Nov. 30, 2000, and of Nov. 30, 2000 until Dec. 15, 2000. The product of these three numbers is the Index total return from Oct. 14, 2000 to Dec. 15, 2000. The total return from Oct. 14, 2000 until Oct. 31, 2000 is the total return of the representative portfolio from Sep. 29, 2000 to Oct. 31, 2000 minims the return from Sep. 29, 2000 to Oct. 13, 2000. [0049] To express the above example in algebraic form, consider a date t [0050] where TR [0051] Or when k=n−1, [0052] where TR [0053] Or when k<n−1,
[0054] where TR [0055] From the end of one month to the end of the next month, the total return of the Index is defined by the total return of a fixed representative portfolio. To compute the return of a representative portfolio one has to calculate the cost of buying the portfolio, same-day settle on the earlier date; the gain from selling the portfolio, same-day settle on the later date; and the value of any pay downs earned. [0056] Let the set
[0057] be the relative weights of the securities composing the generic Index as of the close of the last business day of month i−1. Then the total return of the Index from the close of the last business day of the month i−1 until the close of the last business day of month i is,
[0058] where TR [0059] The price of each pass-through is preferably the same-day settle price, measured on close of the last business day of month i−1 (or k−1), and is denoted p [0060] For any arbitrary business day t in any month i:
[0061] where TR [0062] As shown in FIG. 4, step [0063] Consider a mortgage-backed security of coupon c. At the close of the last business day of a month an investor purchases $1 of the security for price p [0064] and the pay down (1−f) due the month of sale, which is invested at rate r. These numbers suffice to calculate the total return of this security. [0065] For a generic pass-through j, of fixed-rate coupon c, the total return from the close of business on the last business day t [0066] The terms on the right hand side are: [0067] p [0068] r [0069] f [0070] Data for all of these terms is preferably input into the system. [0071] The algorithm for computing f TR [0072] For a specific mortgage pool, the pay down for month i is preferably determined by the actual loans represented in the pool during month i−1. Therefore, two separate pools with the same characteristics can have different total returns. [0073] In the preferred embodiment of the present invention, the Index represents generic pass-throughs, that is, pass-throughs representative of all pools of the same coupon, and original term, issued by the same agency. The total return of a generic pass-through is a weighted average of all of the pass-throughs it represents. [0074] For month i, the factor of the generic pass-through with coupon c, original term t, issued by agency a may be determined by the following algorithm. First the working set is defined as all MBS pools issued by the agency a, of original term t, with fixed coupon c as of the first of month i. With this set, the maximum WALA (Weighted Average Loan Age) for TBA pools will be defined as:
[0075] with all numbers as of the first of month i+1, then the subset of TBA pools will be [0076] Using this set the pay-down factor of month i is calculated as:
[0077] with ρ [0078] As described above, the provided formulas for calculating the total return of the Index is based on the same-day settle price, not standard PSA settle price. As shown for example in FIG. 3, the Bond Market Association announces the MBS settlement dates on which all purchasing transactions have to be settled. However, if the formula for calculating the total return of each generic pass-through is based on this TBA (or PSA) price, the calculation will necessarily include some element of estimating future cash flows. Consequently, in accordance with the preferred embodiment of the present invention, the formulas for converting from standard PSA settle prices to same-day settle prices are provided. As explained above, standard PSA settle price is the market observed price. Equations 5.1-5.5 provide: formulas for converting the standard PSA settle price, 1-month forward, to the same-day settle price. Data related to each term found in Equations 5.1-5.5 is preferably input into the system so that the above calculations may be performed. [0079] There are two major differences between quoting prices with standard PSA settle and with same-day settle. First, standard PSA settle assumes that, while the price is agreed upon today, no payment is made until sometime in the future. Same-day settle requires payment today. Therefore a PSA settle price includes some time value that must be discounted to convert to today's dollars. Second, pass-throughs begin paying principal and interest to the bondholder the month following settlement. Therefore, purchasing securities 1-month forward standard PSA settle entitles the buyer to the pay down two months after the purchase day and not the pay down one month after the purchase date. For same-day settle the buyer is entitled to both of these pay downs. [0080] Let {tilde over (p)} represent the standard PSA settle price for a given TBA pass-through on a given date. The dirty price of that security (actual number of dollars expected for $1 of principal) is,
[0081] where c represents the coupon of the pass-through expressed as a decimal (e.g. 7% implies c=0.07), d [0082] Discounting this price to the day in question, the following formula is derived:
[0083] where r represents the discount funding rate; and d [0084] The value of the pay down and interest for the month following the purchases date is the sum of the two payments (discounted),
[0085] with f representing the factor (derived from Equation 4.3) for that bond for that month. In the above equation, d [0086] Assuming business day t falls in month i, the same-day settle price for a pass-through at the close of business on t, denoted by p [0087] with {tilde over (p)} [0088] When t is the last business day of the month i−1: p [0089] In accordance with the preferred embodiment of the present invention, each index may be characterized by its level. The level of the Index is defined by Equations 6.2 and 6.3 and is calculated in step [0090] In accordance with the preferred embodiment, the starting date of the index is input into the system. Equation 6.2 sets a starting level for this chosen starting date. Equation 6.3 sets the percent level change between two days to be the total return of the Index between those two days. The total return of the Index is determined from the Equations 2.1, 2.2 or 2.3 above. [0091] The level is a useful tool for evaluating an investment in the Index. Assuming monthly reinvestment in the Index, a cash investment of $X on the date t [0092] where P [0093] If on the close of 12/31/93 the initial level of the Index is defined as: P [0094] then on the close of any subsequent date t the level will be
[0095] where TR| [0096] In accordance with the preferred embodiment of the present invention, a system [0097] The input data received by the system from the input [0098] The central hub [0099] On the last business day of month i, the composition of all aggregated pools and other data related to these pools is input into an Index composition processor [0100] Relative weights of each mortgage-backed security included in the Index are preferably calculated in the weights processor [0101] In the preferred embodiment, the system [0102] Pay-down factor f [0103] Same-day-settle price for each security is calculated in the same-day-settle price processor [0104] Total return of the Index from the date t [0105] System [0106] MBS Indices provided in accordance with the present invention may be used as a benchmark for objectively and accurately measuring the performance of the MBS sector of the market. The indices will preferably be published, or otherwise made available, on a monthly basis. The method provided by the present invention for generating MBS indices may be used by portfolio managers for creating index funds mirroring or reflecting the provided MBS indices. The algorithm may be encoded into a computer program and distributed to users on a CD-ROM or another readable storage device. Alternatively, this MBS index-generating program may be stored on a web server or an enterprise server and streamed, downloaded or otherwise provided to interested users on an as-needed basis. Since the composition of each index is preferably held constant throughout a month, fund managers avoid the need to match the provided benchmark's moves on a daily basis. Additionally, the provided system and method allow users to easily and automatically rebalance the index at or near the end of the month. [0107] Having described this invention with regard to specific embodiments, it is to be understood that the description is not meant as a limitation since further variations or modifications may be apparent or may suggest themselves to those skilled in the art. For example, the provided method may easily be modified to generate other types of MBS indices. It is intended that the present application cover such variations and modifications as fall within the scope of the appended claims. Referenced by
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